SECURITIES AND EXCHANGE COMMISSION
================================================================================
Washington, D.C. 20549
----------------------
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from __________ to
__________
Commission file number: 000-22673
SCHICK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3374812
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer
Identification Number)
31-00 47th Avenue 11101
Long Island City, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (718) 937-5765
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [_] No [X]
As of March 14, 2000, 10,136,113 shares of common stock, par value $.01 per
share, were outstanding.
This amendment No. 1 on Form 10-Q/A (the "Amendment") amends and restates in
full the disclosures made by the registrant, Schick Technologies, Inc.
("Schick", and together with its subsidiaries, the "Company"), in response to
"Item 1. Financial Statements," "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 6(a). Exhibits" in its
Form 10-Q as originally filed with the Securities and Exchange Commission (the
"Commission") via Edgar transmission on August 13, 1998 (the "Original Filing").
The disclosures responsive to all other Items in the Original Filing are not
affected by this Amendment but continue as set forth in the Original Filing
without change. Notwithstanding the foregoing, the disclosures in the Original
Filing, as amended by this Amendment, are subject to updating and
supplementation by the disclosures contained in the filings made by the Company
with the Commission for any period subsequent to the quarter ended June 30,
1998, covered by the Original Filing.
SCHICK TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1998
and March 31, 1998.......................................... Page 1
Consolidated Statements of Operations for the three
months ended June 30, 1998 and 1997......................... Page 2
Consolidated Statements of Cash Flows for the three
months ended June 30, 1998 and 1997......................... Page 3
Notes to Consolidated Financial Statements.................. Page 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... Page 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. Page 10
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings........................................... Page 10
Item 2. Changes in Securities and Use of Proceeds .................. Page 12
Item 3. Defaults Upon Senior Securities ............................ Page 12
Item 6. Exhibits and Reports on Form 8-K ........................... Page 12
SIGNATURE....................................................................... Page 13
EXHIBIT 27...................................................................... Page 14
PART I. Financial Information
Item 1. Financial Statements
Schick Technologies, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
Assets June 30, 1998 March 31, 1998
------------- --------------
(As restated, Note 3)
Current assets
Cash and cash equivalents $ 1,649 $ 6,217
Short-term investments 13,933 14,022
Accounts receivable, net of allowance for doubtful
accounts of $656 and $200, respectively 8,565 10,173
Inventories 15,023 12,152
Income taxes receivable 775 --
Prepayments and other current assets 530 746
-------- --------
Total current assets 40,475 43,310
Equipment, net 6,459 5,801
Investments 1,000 1,000
Deferred tax asset -- 349
Other assets 1,265 1,214
-------- --------
Total assets $ 49,199 $ 51,674
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 6,300 $ 7,010
Accrued salaries and commissions 1,438 1,473
Deferred revenue 339 362
Deposits from customers 442 331
Warranty obligations 258 245
Income taxes payable -- 144
-------- --------
Total current liabilities 8,777 9,565
Commitments -- --
Stockholders' equity
Preferred stock ($.01 par value; 2,500,000 shares
authorized, none issued and outstanding) -- --
Common stock ($.01 par value; 25,000,000 shares
authorized; 9,992,566 and 9,992,057 shares issued
and outstanding) 100 100
Additional paid-in capital 41,208 41,204
(Accumulated deficit) retained earnings (886) 805
-------- --------
Total stockholders' equity 40,422 42,109
Total liabilities and stockholders' equity $ 49,199 $ 51,674
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
1
Schick Technologies, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Three months ended June 30,
---------------------------
1998 1997
-------- --------
(As restated, Note 3)
Revenues, net $ 10,439 $ 6,040
Cost of sales 5,636 2,831
-------- --------
Gross profit 4,803 3 ,209
-------- --------
Operating expenses
Selling and marketing 3,938 1,795
General and administrative 1,275 878
Research and development 1,033 638
Bad debt expense 456 --
Patent litigation settlement -- 600
-------- --------
Total operating expenses 6,702 3,911
-------- --------
Loss from operations (1,899) (702)
-------- --------
Other income (expense)
Interest income 243 48
Interest expense -- (43)
-------- --------
Total other income 243 5
-------- --------
Loss before income taxes (1,656) (697)
-------- --------
Provision for income taxes 35 --
-------- --------
Net loss $ (1,691) $ (697)
======== ========
Basic loss per share $ (0.17) $ (0.09)
======== ========
Diluted loss per share $ (0.17) $ (0.09)
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
Schick Technologies, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Three months ended June 30,
---------------------------
1998 1997
------- -------
(As restated, Note 3)
Cash flows from operating activities:
Net loss $(1,691) $ (697)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities
Depreciation and amortization 431 125
Provision for bad debts 456 --
Stock and option grant compensation -- 5
Accrued interest on investments (182) 14
Changes in assets and liabilities:
Accounts receivable 1,152 (635)
Inventories (2,871) (2,183)
Income taxes receivable (775) --
Prepayments and other current assets 216 47
Other assets (96) (29)
Deferred income taxes 349 --
Accounts payable and accrued expenses (732) 3,312
Income taxes payable (144) --
Deferred revenue (23) 58
Deposits from customers 111 (6)
Accrued interest on notes payable -- 39
------- -------
Net cash (used in) provided by operating activities (3,799) 50
------- -------
Cash flows from investing activities:
Purchases of held-to-maturity investments (1,196) (101)
Proceeds from maturities of held-to-maturity investments 1,466 642
Capital expenditures (1,043) (663)
------- -------
Net cash used in investing activities (773) (122)
------- -------
Cash flows from financing activities:
Proceeds from exercise of common stock options 4 --
Deferred offering costs -- (977)
Principal payments on capital lease obligations -- (5)
------- -------
Net cash provided by (used in) financing activities 4 (982)
------- -------
Net decrease in cash and cash equivalents (4,568) (1,054)
Cash and cash equivalents at beginning of period 6,217 1,710
------- -------
Cash and cash equivalents at end of period $ 1,649 $ 656
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
3
Schick Technologies, Inc.
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except share and per share amounts)
1. Basis of Presentation
The consolidated financial statements of Schick Technologies, Inc. and its
subsidiaries (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and the rules
of the Securities and Exchange Commission (the "SEC") for quarterly reports on
Form 10-Q, and do not include all of the information and footnote disclosures
required by generally accepted accounting principles for complete financial
statements. These statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended March 31,
1998 included in the Company's Annual Report on Form 10-K, and Amendment No. 1
thereto.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results of operations for the
interim periods. The results of operations for the three months ended June 30,
1998, are not necessarily indicative of the results to be expected for the full
year ending March 31, 1999.
The consolidated financial statements of the Company, at June 30, 1998,
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances have been eliminated.
2. Inventories
Inventories at June 30, 1998 and March 31, 1998 are comprised of the
following:
June 30, 1998 March 31, 1998
------------- --------------
Raw materials ................................ $ 6,904 $ 7,108
Work-in-process .............................. 4,648 3,466
Finished goods ............................... 3,471 1,578
------------- --------------
Total inventories ................ $ 15,023 $ 12,152
============= ==============
3. Restatement
The Company's previously reported results of operations for the three
months ended June 30, 1998 have been restated to reflect certain prior period
adjustments. The effects of these adjustments, which correct the Company's
accounting for revenue recognition, allowances for sales returns and bad debts
in the three months ended June 30, 1998, are set forth in the following table:
June 30, 1998
-------------
Revenue ........................................... $(5,541)
Cost of sales ..................................... 1,581
-------
Gross profit (loss) ............................... (3,960)
Total operating expenses .......................... (162)
-------
Loss from operations .............................. (4,122)
Income tax benefit ................................ 948
-------
Net loss .......................................... $(3,174)
=======
The adjustments to revenues in the quarter ended June 30, 1998 result primarily
from premature revenue recognition related to "Bill & Hold" transactions and
promotional programs whereby the customer was provided a trial period prior to
the actual purchase of the Company's CDR and accuDEXA systems. Revenues were
initially recognized upon shipment of products subject to the trial period
versus at the expiration of the trial period or upon confirmation from the
customer of their acceptance of the purchase. The adjustments resulted in $3,295
of revenues being shifted from the first fiscal quarter to the second fiscal
4
quarter. Revenues of $2,246 were reduced in the first quarter of 1999 resulting
from the accrual of returns from the fourth quarter of 1999.
Beginning in the second quarter ended September 30, 1998 and accelerating
in the third quarter ended December 31, 1998, product returns and unpaid
accounts receivable increased significantly. Certain of these returns and unpaid
accounts receivable related to product shipments made during the first quarter
ended June 30, 1998. The reasons for these significant increases in bad debts
and product returns are believed to be: (a) a change in sensor and computer
hardware technology announced early in the first quarter of fiscal 1999; (b)
initial problems in servicing and installing orders for new CDR( systems; and
(c) unsuccessful follow-up on accounts receivable. Resultant accounts receivable
write-offs and provisions for returns exceeded the respective accounting
reserves and allowances for bad debts and product returns. Management has
reanalyzed the basis for its previous estimates and determined that insufficient
provisions had been made in the first and second quarters of fiscal 1999.
The Company has analyzed these economic factors and current and prior rates
of returns and bad debts and has revised its current and projected estimates for
product returns and bad debts accordingly.
The previously reported results of operations for the three months ended
June 30, 1998, as reported on Form 10-Q with the Securities and Exchange
Commission, have been amended to reflect the above prior period adjustments. The
results of such prior period adjustments, as compared with the Company's
previously reported quarter, are set forth below.
Three months ended
June 30, 1998
------------------
As originally reported As restated
---------------------- -----------
Revenues net ...................................... $ 15,980 $ 10,439
Cost of sales ..................................... 7,217 5,636
---------- ----------
Gross profit ...................................... 8,763 4,803
Total operating expenses .......................... 6,540 6,702
---------- ----------
Income (loss) from operations ..................... 2,223 (1,899)
Total other income ................................ 243 243
---------- ----------
Income (loss) before taxes ........................ 2,466 (1,656)
Provision for (benefit from)
income taxes ..................................... 983 35
---------- ----------
Net income (loss) ................................. $ 1,483 $ (1,691)
========== ==========
Basic earnings (loss) per share ................... $ 0.15 $ (0.17)
========== ==========
Diluted earnings (loss) per share ................. $ 0.14 $ (0.17)
========== ==========
4. Initial Public Offering
In July 1997, the Company completed its initial public offering (the
"IPO"), selling 2,012,500 shares of common stock at a price of $18.50 per share
providing gross proceeds to the Company of $37,231 and net proceeds, after
underwriting discounts and commissions and offering expenses payable by the
Company, of $33,508.
5. Patent Litigation Settlement
In July 1997, in connection with the settlement of certain pending patent
litigation involving a United States patent directed to a display for digital
dental radiographs, the Company was granted a worldwide, non-exclusive fully
paid license covering such patent in consideration for a payment by the Company
of $600. The Company expensed the license fee in the quarter ended June 30,
1997.
5
6. Loss Per Share
Effective December 31, 1997, the Company adopted statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128") which requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings per
share ("Diluted EPS"). Basic EPS is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted EPS gives effect to all dilutive potential common
shares outstanding during the period. The computation of Diluted EPS does not
assume conversion, exercise or contingent exercise of securities that would have
an antidilutive effect on earnings. Loss per share for the three month period
ended June 30, 1997 have been restated for the adoption of FAS 128. The adoption
of FAS 128 did not have a significant impact on the loss per share for the
three-month period ended June 30, 1997.
The computation of basic and diluted loss per share for the three-month
periods ended June 30, 1998 and 1997 are as follows:
Three months ended June 30,
---------------------------
1998 1997
----------- -----------
Net loss available to common
stockholders ............................. $ (1,691) $ (697)
=========== ===========
Weighted average shares outstanding
for basic and diluted loss per share ..... 9,992,477 7,957,231
=========== ===========
Basic and diluted loss per share ............... $ (0.17) $ (0.09)
=========== ===========
7. Subsequent Events
Investment in Photobit Corporation
In September 1997, the Company purchased a minority interest of 5%, for
$1,000 in Photobit Corporation, a developer of complementary metal-oxide
semiconductor ("CMOS"), APS imaging technology. In July 1998, the Company
invested an additional $250 in Photobit Corporation, bringing its total
investment in Photobit to $1,250. The Company is the exclusive licensee of the
APS technology for medical applications and utilizes the technology in its
bone-mineral density assessment device and certain components of its computed
dental x-ray imaging system. The Company carries the investment at cost. In
September 1999, the Company sold 250,000 shares of Photobit stock for $1,000 and
recorded an investment gain of approximately $565.
Bridge Note Payable
Effective July 30, 1999, the Company secured an extension to the secured
promissory note it initially issued in March 1999 for $5,000. Pursuant to the
amended and restated note, the principal of the note was increased to $6,222.
The increase in the principal amount resulted from the conversion of certain
trade payables owed to the third party lender into the principal balance of the
note. The amended and restated note bears interest at the rate of prime plus two
and one-half percent per annum. Interest on the note is payable monthly and the
note is secured by the Company's tangible and intangible assets. The principal
is payable in quarterly installments of $1,000 commencing December 31, 1999. The
Company is also required to make additional principal payments equal to 25% of
the net proceeds of any equity or debt financing or asset sale (other than sales
of inventory in the ordinary course of business) to the extent that 25% of such
proceeds exceeds the $1,000 principal installment due at the end of the quarter
in which the financing or asset sale is completed. In connection with the
amended and restated note, the Company issued 650,000 warrants to the
note-holder. The warrants are exercisable for a period of 5 years and each have
an exercise price of $2.19. The Company is not in compliance with certain
financial covenants, and other terms and provisions contained in the extended
bridge loan and is currently in the process of refinancing the obligation.
6
NASDAQ Delisting
On September 15, 1999, the Company received notice from the Nasdaq Listings
Qualifications Panel that its common stock would no longer be listed on the
Nasdaq National Market effective with the close of business on September 15,
1999. The panel's action was based on the Company's inability to timely file its
Annual Report on Form 10-K for the fiscal year ended March 31, 1999 and public
interest concerns regarding the Company's revenue recognition and sales
practices.
Greystone Funding Corporation
In December 1999, the Company entered into a Loan Agreement (the "Loan
Agreement") with Greystone Funding Corporation ("Greystone") to provide up to
$7.5 million of subordinated debt in the form of a secured credit facility.
Pursuant to the Loan Agreement, and to induce Greystone to enter into said
Agreement, the Company issued to Greystone and its designees, warrants to
purchase 3,000,000 shares of the Company's Common Stock at an exercise price of
$0.75 per share. The Company agreed to issue to Greystone or its designees
warrants to purchase an additional 2,000,000 shares at an exercise price of
$0.75 per share in connection with a cash payment of $1 million by Greystone to
the Company in consideration of a sale of Photobit stock by the Company to
Greystone. The sale of the Photobit stock was made subject to a right of first
refusal held by Photobit and its founders. By letter dated February 17, 2000,
counsel for Photobit informed the Company that Photobit considers the Company's
sale of its shares to Greystone to be void on the basis of the Company's
purported failure to properly comply with Photobit's right of first refusal.
On March 17, 2000, the Company and Greystone entered into an Amended and
Restated Loan Agreement effective as of December 27, 1999 (the "Amended Loan
Agreement") pursuant to which Greystone agreed to provide up to $7.5 million of
subordinated debt in the form of a secured credit facility. The $1 million cash
payment to the Company was converted as of December 27, 1999 into an initial
advance of $1,000,000 under the Amended Loan Agreement. Pursuant to the Amended
Loan Agreement, and to induce Greystone to enter into said Agreement, the
Company issued warrants to Greystone and its designees, inclusive of those
warrants previously issued under the Loan Agreement, to purchase 5,000,000
shares of the Company's Common Stock at an exercise price of $0.75 per share,
exercisable at any time after December 27, 1999. Under the Amended Loan
Agreement, the Company also issued to Greystone or its designees warrants (the
"Additional Warrants") to purchase an additional 13,000,000 shares of common
stock, which Additional Warrants will vest and be exercisable at a rate of two
shares of Common Stock for each dollar advanced under the Amended Loan Agreement
in excess of the initial draw of $1,000,000. Any Additional Warrants which do
not vest prior to expiration or surrender of the line of credit will be
forfeited and canceled. In connection with the Greystone secured credit
facility, effective as of February 15, 2000, DVI Financial Services, Inc., the
Company's senior lender, consented to the Company's grant to Greystone of a
second priority lien encumbering the Company's assets, under and subject in
priority and right of payment to all liens granted by the Company to DVI.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words or
phrases "believes," "may," "will likely result," "estimates," "projects,"
"anticipates," "expects" or similar expressions and variations thereof are
intended to identify such forward-looking statements. Actual results, events and
circumstances could differ materially from those set forth in such statements
due to various factors. Such factors include dependence on products,
competition, the changing economic and competitive conditions in the medical and
dental digital radiography markets, dependence on key personnel, dependence on
distributors, ability to manage growth, fluctuation in results and seasonality,
regulatory approvals, technological developments, protection of technology
utilized by the Company, patent infringement claims and other litigation, need
for additional financing and further risks and uncertainties, including those
detailed in the Company's other filings with the Securities and Exchange
Commission.
7
General
The Company designs, develops and manufactures digital imaging systems and
devices for the dental and medical markets. In the field of dentistry, the
Company has developed, and currently manufactures and markets, an intra-oral
digital radiography system. The Company has also developed a bone mineral
density assessment device, which was introduced in December of 1997, to assist
in the diagnosis of osteoporosis. The Company is also developing a radiographic
imaging device for digital mammography and has commenced development of a
general digital radiography device for intended use in various applications.
Results of Operations
Net revenue for the three months ended June 30, 1998 (the first quarter of
fiscal 1999) increased $4.4 million (73%) to $10.4 million from $6.0 million
during the comparable period of fiscal 1998. The revenue growth is due to
increased sales of the Company's CDR(R) dental product and to sales of its
accuDEXA(TM) bone density assessment device. The accuDEXA was introduced during
the third quarter of fiscal 1998, and did not contribute significantly to
revenues until the first quarter of fiscal 1999.
Fiscal 1999 revenues were negatively affected by a rate of return for the
Company's products shipped during the first quarter of fiscal 1999 which was
higher than the historical return rate for the Company's products. Product
returns related to first quarter shipments were generally returned by customers
to the Company in the second and third quarters. In addition, revenues were
negatively affected by an increase in reserves for goods which may be returned
in the future. Provisions for returns are comprised of actual returns and
estimates for future returns.
On a net of returns basis, in the first quarter of fiscal 1999, CDR
represented approximately $7.2 million (69%) of the Company's sales and accuDEXA
represented approximately $3.2 million (31%) of the Company's sales.
The rate of returns in fiscal 1999 increased significantly over 1998. The
increased return rate for CDR is believed to be attributable to several factors,
including the following:
The Company experienced technical problems in transitioning its CDR product
line from CCD sensors to APS sensors. Shipments of the Company's initial version
of its new APS sensor for the CDR product, which were primarily delivered from
April 1998 through August 1998, exhibited a high failure rate and other
technical problems. The Company has provided for replacements of systems shipped
during this period where practical and provided for anticipated returns for
units which were not upgradeable. In September 1998, the Company began shipping
a new version of the APS sensor which has exhibited a lower failure rate than
the initial version. The Company continues to work to improve the reliability
and enhance the self-diagnostic capabilities of the CDR product.
The Company also experienced a higher than normal rate of returns of
accuDEXA units. The Company believes that these returns are due to several
factors, including the following:
First, shipments of accuDEXA experienced a higher than normal failure rate
due to shipping damage, as well as humidity and temperature sensitivity of
several components in the initial design of the product. The Company has taken
steps to address these problems and believes that failure rates relating to such
damage and sensitivity have dropped significantly. In this regard, the Company
currently expects to implement a number of additional improvements to accuDEXA,
to further increase reliability, in the first half of fiscal 2001.
Second, the Company initiated a change in its sales policy which affected
accuDEXA sales made from May 1998 through November 1998. During this time, the
Company waived its customary 10% deposit charged to customers prior to shipment
of goods. In December 1998, the Company changed its credit policy requiring
prepayment from non-dealer customers.
Cost of sales for the three months ended June 30, 1998 increased $2.8
million (99%) to $5.6 million (54% of net revenue) from $2.8 million (47% of net
revenue) for the comparable period of fiscal 1998.
8
In general, cost of goods was increased by additional direct and indirect
labor costs, increased warranty expenditures, increased material costs,
increased royalty costs for certain goods and increased overhead.
Selling & Marketing expenses for the three months ended June 30, 1998,
increased $2.2 million (119%) to $4.0 million (38% of net revenue) from $1.8
million (30% of net revenue) for the comparable period of fiscal 1998. This
increase was attributable principally to the hiring and training of new sales
representatives as the Company continued to increase the size of its national
sales force and its promotional programs to obtain greater market awareness and
to develop market strategies for new products.
General and administrative expenses for the three months ended June 30,
1998, increased $0.4 million (45%) to $1.3 million (12% of net revenue) from
$0.9 million (14% of net revenue) for the comparable period of fiscal 1998.
General and administrative cost increases were attributable to increased
administrative expenditures, primarily the hiring of administrative personnel.
Bad debt expense included an increase of $456 thousand for reserves for
doubtful accounts. The reserve for doubtful accounts was restated for the first
quarter of fiscal 1999 due to reevaluation of collection information related to
sales in the first quarter of fiscal 1999
Research and development expenses for the three months ended June 30, 1998,
increased $0.4 million (62%) to $1.0 million (10% of net revenue) from $0.6
million (11% of net revenue) for the comparable period of fiscal 1998. The
increase in spending reflects costs associated with the research and development
of mammography and panoramic x-ray systems and the hiring of additional research
and development personnel.
In July 1997, the Company, in connection with the settlement of certain
pending patent litigation involving a United States patent directed to a display
for digital dental radiographs, was granted a worldwide, non-exclusive fully
paid license covering such patent in consideration for a payment by the Company
of $0.6 million. The Company expensed that license fee during the quarter ended
June 30, 1997.
Interest income increased to $243 thousand in the three months ended June
30, 1998 from $48 thousand in the comparable period of fiscal 1998. The increase
is attributable to higher cash balances and investments in short-term
interest-bearing securities that were purchased with the proceeds of the
Company's Initial Public Offering (the "IPO"). Interest expense of $43 thousand
for the three-month period ended June 30,1997 was principally attributable to a
loan from Merck & Co. Inc. that was repaid upon consummation of the IPO.
Liquidity and Capital Resources
Net proceeds from the July 1997 IPO were approximately $33.5 million. At
June 30, 1998, the Company had $1.6 million in cash and cash equivalents, $13.9
million in short-term investments and $31.7 million in working capital compared
to $6.2 million in cash and cash equivalents, $14.0 million in short-term
investments and $33.7 million in working capital at March 31, 1998.
During the three months ended June 30, 1998, cash used in operations was
$3.8 million compared to $50 thousand provided by operations during the
comparable period of fiscal 1998. The increased cash used in operations is
primarily attributable to increases in the Company's inventory levels. The
increase in inventory of $2.9 million from $12.2 million at March 31, 1998 to
$15.0 million at June 30, 1998 is primarily attributable to the unsold (or
returned) CDR and accuDEXA units.
The Company's capital expenditures during the three-month period ended
December 31, 1998 were in the amount of $1.0 million. Such expenditures included
leasehold improvements, computers, and production equipment.
In spite of the Company's cost reductions, refinancing and tightening of
credit, there can be no assurance that the Company will achieve profitability or
generate sufficient working capital to permit its continuation as a going
concern. Management currently believes that existing capital resources, which
have been diminished as a result of losses in fiscal 1999, and sources of
credit, including the Greystone credit
9
facility, are adequate to meet its current cash requirements. The ability of the
Company to satisfy its cash requirements is dependent in part on the Company's
ability to attain adequate sales and profit levels and to control warranty
obligations by increasing warranty revenues and reducing warranty costs, and to
collect its accounts receivable on a timely basis. However, if the Company's
cash needs are greater than anticipated or the restructuring of the bridge note
payable is not completed, or the company does not satisfy drawdown conditions
under the Amended Loan Agreement, the Company will be required to seek
additional or alternative financing sources. There can be no assurance that such
financing will be available or available on terms acceptable to the Company.
Year 2000 Compliance
The Year 2000 problem is the result of computer programs having been
written using two digits rather than four to define the applicable year. A
computer program that has date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. Should systems fail to process
date information correctly because of the calendar year change to 2000,
significant problems could occur as a result. Through the filing date of this
Report, the Company has not experienced any material adverse effects resulting
from or relating to the Year 2000 computer problem.
Item 3. Quantitative and Qualitative Disclosures About Market risk
The DVI Bridge Loan bears an annual interest rate based on the prime rate
plus 2.5%. Because the interest rate is variable, the Company's cash flow may be
adversely affected by increases in interest rates. Management does not, however,
believe that any risk inherent in the variable-rate nature of the loan is likely
to have a material effect on the Company's interest expense or available cash.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and/or certain of its officers and former officers, are
involved in the proceedings described below:
I. The Company is a named defendant in two lawsuits instituted by Trophy
Radiologie, S.A. (`Trophy S.A.'), a subsidiary of Trex Medical Corporation. One
lawsuit was instituted in France and the other in the United States.
The French lawsuit was filed in November 1995, in the tribunal de Grande
Instance de Bobigny, the French patent court, and originally alleged that the
Company's CDR(R)system infringes French Patent No. 2,547,495, European Patent
No. 129,451 and French Certificate of Addition No. 2,578,737. These patents, all
of which are related, are directed to a CCD-based intra-oral sensor. Since
filing its lawsuit, Trophy S.A. has withdrawn its allegation of infringement
with respect to the Certificate of Addition. Trophy S.A. is seeking a permanent
injunction and unspecified damages, including damages for its purported lost
profits. The Company believes that the lawsuit is without merit and is
vigorously defending it.
The lawsuit in the United States was filed in March 1996 by Trophy S.A.,
Trophy Radiology, Inc., a United States subsidiary of Trophy S.A. (`Trophy
Inc.') and the named inventor on the patent in suit, Francis Mouyen, a French
citizen. The suit was brought in the United States District Court for the
Eastern District of New York, and alleges that the Company's CDR(R) system
infringes United States Patent No. 4,593,400 (the `400 patent'), which is
related to the patents in the French lawsuit. Trophy S.A., Trophy Inc. and
Mouyen are seeking a permanent injunction and unspecified damages, including
damages for purported lost profits, enhanced damages for the Company's purported
willful infringement and an award of attorney fees. The Company believes that
the lawsuit is without merit and is vigorously defending it. The Company's
counsel in the United States suit has issued a formal opinion that the CDR
system does not infringe the 400 patent.
In addition, the Company has counter-sued Trophy S.A. and Trophy Inc. for
infringement of United States Patent No. 4,160,997, an expired patent which was
exclusively licensed to the Company by its inventor, Dr. Robert Schwartz, and
for false advertising and unfair competition. The Company believes that
10
its counter-suit is meritorious, and is vigorously pursuing it.
On September 12, 1997, after having been given permission to do so by the
Court, the Company served two motions for summary judgment seeking dismissal of
the action pending in the United States District Court for the Eastern District
of New York, on the grounds of non-infringement and patent invalidity. On
February 22, 2000, oral argument on these motions was heard by the Court. The
motions are currently pending.
While the Company believes such suits against it are without merit, there
can be no assurance that the Company will be successful in its defense of any of
these actions, or in its counter-suit. If the Company is unsuccessful in its
defense of any of these actions, it could have a material adverse effect upon
the Company. Moreover, regardless of their outcome, the Company may be forced to
expend significant amounts of money in legal fees in connection with these
lawsuits.
II. In late 1998 through early 1999, nine shareholder complaints purporting
to be class action lawsuits were filed in the United States District Court for
the Eastern District of New York. Plaintiffs filed a Consolidated and Amended
Complaint on or about May 27, 1999 and, on or about November 24, 1999, filed a
Second Amended and Consolidated Complaint (the "Complaint"). The Complaint names
as defendants the Company, David B. Schick, Thomas E. Rutenberg, and David
Spector (collectively, the "Individual Defendants"), as well as
PricewaterhouseCoopers LLP.
The Complaint alleges, inter alia, that certain defendants issued false and
misleading statements concerning the Company's publicly reported earnings in
violation of the federal securities laws. The Complaint seeks certification of a
class of persons who purchased the Company's Common Stock between July 1, 1997
and February 19, 1999, inclusive, and does not specify the amount of damages
sought.
The Company has retained counsel, believes that these lawsuits are without
merit, and intends to vigorously defend them. On or about February 11, 2000, the
Company and the Individual Defendants filed a Motion to Dismiss the Complaint.
As these actions are in their preliminary stages, the Company is unable to
predict their ultimate outcome. The outcome, if unfavorable, could have a
material adverse effect on the Company.
III. In August 1999, the Company, through its outside counsel, contacted
the Division of Enforcement of the Securities and Exchange Commission ("SEC") to
advise it of certain matters related to the Company's restatement of earnings.
The SEC has made a voluntary request for the production of certain documents.
The Company intends to cooperate fully with the SEC staff and has provided
responsive documents to it. The inquiry is in a preliminary stage and the
Company cannot predict its potential outcome.
The Company may be a party to a variety of legal actions (in addition to
those referred to above), such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, including securities fraud, and
intellectual property related litigation. In addition, because of the nature of
its business, the Company is subject to a variety of legal actions relating to
its business operations. Recent court decisions and legislative activity may
increase the Company's exposure for any of these types of claims. In some cases,
substantial punitive damages may be sought. The Company currently has insurance
coverage for some of these potential liabilities. Other potential liabilities
may not be covered by insurance, insurers may dispute coverage, or the amount of
insurance may not be sufficient to cover the damages awarded. In addition,
certain types of damages, such as punitive damages, may not be covered by
insurance and insurance coverage for all or certain forms of liability may
become unavailable or prohibitively expensive in the future.
11
Item 2. Changes in Securities and Use of Proceeds
(d) On July 7, 1997, the Company's initial public offering (the "Offering")
of 1,750,000 shares of its common stock, $.01 par value per share (the "Common
Stock") closed. The Company's registration statement on Form S-1 (Registration
No. 333-33731) was declared effective by the Securities and Exchange Commission
on June 30, 1997. As part of the Offering, the Company granted to the
Underwriters over-allotment options to purchase up to 262,500 shares of Common
Stock ("the "Underwriters' Option"). On July 10, 1997, the underwriters
exercised the Underwriters' Option purchasing 262,500 shares of Common Stock
from the Company. The aggregate offering price of 2,012,500 shares of Common
Stock registered for the account of the Company pursuant to the Offering
(inclusive of the Underwriters' Option) was $37.2 million.
The aggregate net proceeds received by the Company from the Offering and as
a result of the exercise of the Underwriters' Option, after deducting
underwriting and commissions and expenses were $33,508,731. During the period of
July 1, 1997 through March 31, 1999, such net proceeds have been applied as
follows: (i) $1,606,000 for leasehold improvements; (ii) $5,248,000 for plant
and equipment; (iii) $1,450,000 to purchase certain assets of Keystone Dental
X-Ray Corp.; (iv) $1,250,000 to purchase a 5% interest in Photobit, Inc.; (v)
$1,512,833 to pay the notes payable and interest in the amount of $144,296 to
Merck & Co., Inc.; and (vii) the remaining $22,442,000 was used in its entirety
for working capital purposes and to fund the Company's substantial operation
losses in 1999. None of the net proceeds were paid, directly or indirectly, to
directors, officers, controlling stockholders, or affiliates of the Company.
Item 3. Defaults Upon Senior Securities
DVI Financial Services, Inc. ("DVI") has provided the Company with loans
and advances up to $6,222,000 in the aggregate (the "Bridge Loan"), which is
secured by first priority liens on collateral consisting of all of the Company's
now-owned and hereafter-acquired tangible and intangible personal property
including, without limitation, cash, marketable securities, accounts receivable,
inventories, contract rights, patents, trademarks, copyrights and other general
intangibles, machinery, equipment and interests in real estate of the Company,
together with all products and proceeds thereof. The Company is not in
compliance with certain financial covenants and other terms and provisions
contained in the Bridge Loan. The Company and DVI have entered into a commitment
letter for the restructuring of its Bridge Loan.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule (Filed in electronic format only)
12
SCHICK TECHNOLOGIES, INC.
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHICK TECHNOLOGIES, INC.
/s/ David Schick
---------------------------------
Date: March 20, 2000 By: /S/ David B. Schick
David B. Schick
Chief Executive Officer
/s/ Ronald Rosner
---------------------------------
By: /S/ Ronald Rosner
Controller
(Principal Financial Officer)
13